BETWEEN NEGOTIATION AND WAR

 

General Conflict Overview

The third quarter of 2026 remains just as full of uncertainty and complexity as the start of the year. This has kept the oil market on a “roller coaster,” reacting to geopolitical decisions that are unpredictable both in their purpose and their effects. Throughout the week, oil prices swung widely between $82/bbl and $92/bbl in Brent terms, responding to daily jolts from diplomatic announcements and acts of war between the U.S. and Iran.

On the Russia-Ukraine front, Russia has intensified its attacks on Ukrainian civilian infrastructure, and Ukraine continues to inflict damage on Russia’s energy and financial systems. As if that weren’t enough, a new development emerged that could prove significant: Ukraine carried out a surprise long-range drone strike on an Iranian vessel in the Caspian Sea allegedly carrying weapons and missiles to Russian territory. This attack expands the geographic boundaries of the war, linking two regional conflicts that had until now been separate.

The Islamist movement Hamas has announced its acceptance of a disarmament agreement in the Gaza Strip, mediated by the Board of Peace promoted by the United States; Israel has not responded. Meanwhile, on the northern front, Israel’s military continues operations to destroy key Hezbollah infrastructure in southern Lebanon, despite ongoing diplomatic efforts.

In an exercise of optimistic extrapolation, one could foresee that both the Gaza and Lebanon conflicts are beginning to wind down, given the impossibility of sustaining stalemated wars that generate unrest and waste resources for all countries involved.

The dissenting note has come from Yemen, where the Houthis have attacked Saudi tankers to prevent them from leaving the Red Sea, and have also struck critical infrastructure such as the Yanbu terminal, prompting heavy bombardment of Houthi targets by Saudi Arabia and the United States.

President Trump, meanwhile, is taking advantage of the increasingly distant relationship between Iran and the Arab countries of the Persian Gulf to pressure them into establishing relations with Israel through the Abraham Accords.

Geopolitical Fundamentals

The weekly cycle of volatility, marked by apparent pauses for negotiation followed by escalations of war, has set the tone for the discordant relations between the warring sides. Iran has taken care to draw in both its proxies and neighboring countries, striking them on the pretext that they host U.S. military bases, to pressure Trump through his regional allies. For his part, Trump’s maximalist rhetoric also provokes militaristic responses from Iran, which is unwilling to show weakness amid the interrupted negotiations.

The behavior of oil prices showed that the market tended to react to optimistic future expectations rather than physical supply realities. Consider the most notable turning points:

●      On Monday, July 27, a diplomatic truce appeared to take shape, and prices plunged more than 5% after the announcement of a pause in the bombing campaign. The perception that diplomacy was gaining ground eased the risk premium.

●      In less than 48 hours, on Wednesday the 29th, the calm was shattered; an Iranian missile attack on a U.S. base in Jordan and the resulting American and Iraqi reprisals broke off the negotiations. As expected, prices spiked more than 7% in a single day.

●      Once again, on Friday the 31st, deep skepticism resurfaced, and crude prices climbed, albeit moderately, simply because Trump declared he was “losing faith” in the Iranian negotiators and accused them of lying.

Maritime chokepoints proved to be a formidable instrument of pressure. The war of perceptions used the two crucial transit zones, the Strait of Hormuz and the Bab el-Mandeb, to apply pressure in the negotiations. Although reports indicate that both routes are nearly closed, some sources report that around thirteen million barrels per day (13 MMbpd) of crude passed through the Strait of Hormuz, and more than four million barrels per day (4 MMbpd) exited through the Red Sea.

On the Red Sea front, the situation grew more complicated after Yemen’s Houthi rebels attacked key terminals in Jizanand Yanbu (the terminal of Saudi Arabia’s East-West pipeline), aiming to neutralize some of the alternative routes used to bypass the Strait of Hormuz. China negotiated directly with the Houthi rebels to allow its tankers to cross the Red Sea without reprisals, fragmenting the impact of the logistical blockade.

The hidden strategy of “war and negotiation” reflects the fact that neither side is seeking an all-out war, but rather looking to improve its negotiating position. Iran, in particular, is trying to use its remaining military capacity to strangle global shipping traffic and force the lifting of the U.S. naval blockade during the periods of “truce.”

The supply crisis has pushed refining margins to record highs. U.S. refineries are operating at the limit of their capacity to offset the damage suffered by Russian and Middle Eastern refiners and to capitalize on the products supply crunch. AAA, which tracks U.S. fuel prices, shows average prices above $4 per gallon for gasoline and $5 per gallon for diesel.

Gaza and Lebanon, the Other Conflict

Meanwhile, Hamas has formally confirmed its acceptance of a roadmap presented by President Trump and his Board of Peace. The plan calls for an end to hostilities, the handover of Hamas’s heavy weaponry, and the transfer of civilian authority to an independent, technocratic Palestinian administration. In return, Hamas is demanding the complete, gradual withdrawal of the Israel Defense Forces (IDF) from the Gaza Strip. It has also made later phases of the disarmament conditional on the eventual creation of a Palestinian state.

Netanyahu’s government has not issued an official confirmation that it accepts the roadmap. Leaders from the far-right wing of his coalition have voiced outright rejection of the deal, arguing that it halts the military offensive without guaranteeing the territory's complete demilitarization. Intermittent airstrikes on Gaza continue as verification mechanisms are discussed.

Not far from Gaza, in southern Lebanon, Israel continues carrying out ground operations. Israeli troops killed multiple Hezbollah operatives in the hills of Ali al-Taher (Nabatieh). They set off massive explosions to demolish an extensive network of underground tunnels beneath the historic Beaufort Castle.

Opposition to the Framework Agreement

Although Lebanon’s civilian government under Joseph Aoun previously signed a U.S.-backed framework agreement to deploy the official army in the south and restore territorial sovereignty, Hezbollah has flatly rejected the pact. Its leader, Naim Qassem, called the deal a “humiliating capitulation” and vowed the group would not lay down its arms. Technical delegations from Israel and Lebanon are scheduled to meet on August 4 in Italy to advance the withdrawal and border-stabilization phases.

Price Dynamics

Oil and natural gas prices trended lower, with a slight recovery by the close, driven mainly by the temporary easing of geopolitical tensions in the Middle East and a reduced risk premium following the apparent reopening of key shipping routes, such as the Strait of Hormuz.

The crude market closed out July with a rebound in the final sessions, despite touching two-week lows at midweek. Brent crude closed on Friday, July 31 at $87.93/bbl, posting a final intraday gain of 1.21%. WTI crude ended the week trading at $84.67/bbl, up 1.29% on Friday.

The market found a floor after a 4% decline on July 28. It was supported by J.P. Morgan projections estimating an average of $86/bbl for Brent this third quarter, though this is tempered by weaker global commercial demand.

Natural gas moved unevenly by region, with a sharp cumulative pullback in the U.S. market contrasting with volatility in the European market. Henry Hub natural gas closed the week at $2.75/MMBtu, a decline of nearly 14.6% over the past month, due to increased U.S. dry gas production, estimated by the Energy Information Administration (EIA) at 111.2 billion cubic feet per day (bcfd), which limited inflationary pressures in North America. Even so, intense heat waves boosted demand for air-conditioning electricity, preventing a larger drop in prices.

In Europe, Dutch TTF natural gas closed between €59.07/MWh and €59.44/MWh on July 31. At the start of the week (July 27), the price fell sharply by 7.3%, settling around €58/MWh amid the “diplomatic thaw.” However, Goldman Sachs analysts warned that low European inventories (at 55% of capacity) will keep risks skewed to the upside.

In the United States, the Federal Reserve voted on Wednesday to hold its key interest rate steady, though not without overcoming opposition from three committee members who voiced concern about inflation and wanted to raise rates. Curiously, the Trump administration appears to be giving the new Fed Chair, Kevin Warsh, the benefit of the doubt and has not commented on the decision.

VENEZUELA

THE U.S. EXPERIMENT STILL ISN’T DELIVERING SUSTAINABLE RESULTS

American magazine TIME devoted its weekly cover to promoting an interview with Delcy Rodríguez (“How Delcy Rodríguez Went From Maduro Loyalist to Trump Proxy”). The interview has drawn widespread criticism, with many calling it commissioned journalism. In any case, beyond the views Rodríguez expressed in the interview, the reality on the ground tells a very different story from the one Washington and Caracas want to narrate.

Venezuela’s persistent lack of transparency, evident in a series of opaque agreements over oil sales and the allocation of production blocks, is hampering execution of the energy-sector reconstruction plan, estimated at $100 billion, which sits at the heart of Washington’s long-term strategy. Opacity in the sector is not confined to Venezuela’s domestic sphere, which has long been well known; there are also signs that certain non-transparent practices have allies among brokers in Washington and Houston.

After Nicolás Maduro’s ouster and the installation of an interim government led by his vice president, Delcy Rodríguez, Washington and Caracas sought to attract large-scale foreign direct investment to revive Venezuela’s oil industry. However, international oil companies have encountered processes, laws, regulations, high levels of discretion, and timelines that, far from facilitating private investment, have instead obstructed it.

These companies recognize the opportunities in the hemisphere’s largest hydrocarbons basin, but warn that institutional opacity, structural deterioration, and doubts over the sustainability of investments under the current regime make it difficult for them to participate. As a result, a view is taking hold that the hydrocarbons sector’s recovery phase requires urgent adjustments and greater institutional certainty.

The Three Phases

This process, summarized in the three phases of the Rubio Plan — stabilization, recovery, and transition — has failed to move forward on schedule, due in part to a lack of coherence in the interim government’s policies. On the economic front, despite handling a volume of foreign currency nearly four times that received from sales to China before January 3, the official exchange market continues to track the alternative rate. Although the gap with the official rate has narrowed, current measures do not appear sufficient to close it. Controlling liquidity and inflation remains, for now, a pipe dream.

The third phase, the transition — the one most eagerly awaited by the public — has remained essentially frozen. This may reflect the thesis attributed to the Trump administration, according to which the economy and public services needed to be restored before fully tackling the reconstruction of the democratic process, derailed nearly three decades ago. It could also be, as some argue, that the current arrangement favors a predominantly commercial relationship that, in any case, shows little progress.

Seven months into the Three-Phase Plan, participants sense that much of the difficulty stems from the interim government’s inherently temporary nature. Politicians, investors, and citizens alike understand that moving toward a stable, democratically elected government operating under full freedoms would be the key factor in the hydrocarbons sector’s recovery, economic growth's return, and the humanitarian crisis's easing. This goal is all the more urgent in a country that has endured more than two decades of deep institutional decay and that, on top of that, has been dealt a harsh blow by nature in the form of two earthquakes that exposed the interim government’s improvisation and lack of preparedness.

Against this backdrop, and under U.S. tutelage, an institutional process is beginning, led by Dinorah Figuera, president of the 2015 National Assembly, and Jorge Rodríguez, president of the sitting 2025 National Assembly. Representatives of both assemblies would meet jointly to reach agreements on the National Electoral Council (CNE), the Supreme Tribunal of Justice (TSJ), the release of political prisoners, freedom of the press and of expression, and the restoration of conditions for political coexistence that would allow parties to compete on equal footing in the country’s political processes.

The first meeting, scheduled for August 1, was limited to a phone call and two statements. This, together with the published agenda, has caused disappointment and no shortage of criticism; American backing — that is, pressure from Washington — continues to fuel hopes that results will finally materialize this time.

Oil Operations

The final days of July brought electricity-supply problems. Power outages across the country have disrupted daily life for Venezuelans and affected the hydrocarbons industry, making it imperative to find timely, practical solutions — whether through improvements to hydroelectric and thermoelectric generation and transmission, or by encouraging self-generation, especially within the hydrocarbons industry, through appropriate mechanisms.

Production totaled 953,000 barrels per day (Mbpd), distributed geographically as follows:

West: 270

East: 110

Orinoco Belt: 573

TOTAL: 953

In the petrochemical sector, both the storm mentioned last week and this week’s power outages reduced average output at the José petrochemical plants.

Refining rates fell due to the El Palito refinery going offline, with a corresponding drop in gasoline and diesel output to 77 and 75 Mbpd, respectively.

Final export figures for the month have not yet been tallied or analyzed. Exports were lower than the previous month, though crude exports to the U.S. were very similar to June’s level at 621 Mbpd; exports to India and Europe absorbed the reduction. Without the official close-out figures in hand, we estimate average exports at 970 Mbpd.

The price of the Venezuelan export basket rose, reflecting international price trends and a greater share of exports going to the U.S., reaching an average of $73.6/bbl.

[1] International Analyst

[2] Nonresident Fellow, Baker Institute